Trends, Considerations and Best Practices for Recurring Revenue Models

Sep 26, 2012

Businesses that operate within a recurring revenue management model face a number of challenges. The sheer volume of agreements entered into by these companies demand that contract management methods have to be top-of-the-line, invoicing systems need to be incredibly accurate and, perhaps most importantly

Businesses that operate within a recurring revenue model face a number of challenges. The sheer volume of agreements entered into by these companies demand that contract management methods have to be top-of-the-line, invoicing systems need to be incredibly accurate and, perhaps most importantly, all data management tools can be easily scalable to allow for business expansion.

With so many issues facing these types of organizations, it's important to investigate all the possible alternatives to ensure the most effective systems are in place. There are several best practices businesses can follow when it comes to repeat billing and contract management.

Subscription expansion
There are several emerging trends that will lead to a significant expansion in the amount of businesses that generate their income through subscriptions and recurring revenue streams. One apt example is the veritable explosion of Software-as-a-Service providers, who supply businesses of all kinds with cloud-based tech solutions ranging from customer relationship management to data storage and security to web content management.

A recent report from business sales research firm Gartner found that as many as 35 percent of global 2000 companies will generate a significant portion of their revenue through subscription-based services by 2015. And as of 2011, roughly 83 percent of new software companies were projected to enter the market as a subscription service, rather than a purchased product, according to a recent IDC report.

Software and tech services aren't the only industries experiencing the shift to subscription services. The entertainment industry provides another perfect example. While once Blockbuster Video was the king of at-home movie watching with its rental stores strewn across the country, Netflix has emerged as the heir apparent, charging subscribers a nominal monthly fee for unlimited access to movies online or delivered to their homes.

Recurrent considerations
The first thing any company with a recurring revenue model must consider is the terms of its subscription services. Determining whether users should pay a monthly or annual fee, and determining what that fee should be, are obvious factors that should be taken into account, but beyond payment collection periods, companies must include terms of use into their contracts to ensure the value of the services rendered does not exceed the income generated through subscriptions.

To return to the Netflix example, the company allows unlimited access to its online content for a small fee, but charges a premium for DVDs to be sent to subscribers' homes. Much of the DVD content isn't available to internet users, creating an incentive to purchase a more expensive package. By charging customers depending on how they use the service, rather than simply providing one blanket rate, the company is able to more efficiently cover its operating costs while providing an attractive package of services to consumers.

Customer support is another factor subscription-based organizations need to carefully consider. A classic approach is to offer service as part of the subscription fee. This might work better for some businesses than others, however. A complicated suite of cloud-based software, for example, might require more specialized - and therefore more expensive - support. Charging subscribers a small per-use fee for support might make better fiscal sense to some.

Solutions and best practices
Given the constantly fluctuating nature of subscription-based companies - new users are continually being signed up, existing users may change their subscription packages, etc. - it is essential that these types of businesses have a robust, flexible billing and subscription management platform that allows for easy expansion. And, since billing is the engine that drives subscription businesses, the platform should also gather real-time metrics regarding sales, pricing and renewals, which can inform strategic planning, marketing and other big-picture aspects of the company.